Safiya Malik

The High Court of Kerala Single Bench of Justice Ziyad Rahman A.A. held that the tax department cannot proceed against a recipient for alleged input tax credit mismatch without first initiating action against the supplying dealers and using the statutory mechanism to notify any discrepancy to both sides. In a challenge by a registered dealer to a notice proposing disallowance and recovery of ITC for 2019–2020, the Court noted that Section 42(3) of the Central Goods and Services Tax Act, 2017 governs communication of differences in ITC claims between recipient and supplier. Finding that no steps were taken against the suppliers before issuing notice under Section 73, contrary to Section 42, the Court set aside the notice while leaving open proceedings against the suppliers.

The petitioner, a registered assessee under the CGST Act, challenged a show cause notice issued under Section 73 proposing to disallow and recover input tax credit claimed for the assessment year 2019–2020. The notice also proposed imposition of penalty. The petitioner had made purchases from two suppliers, supported by tax invoices and corresponding e-way bills. Based on these documents, the petitioner filed returns and availed input tax credit. The suppliers, however, failed to upload details of the supplies or remit tax.

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The petitioner contended that proceedings were initiated against it without initiating any action against the suppliers, which was contrary to the procedure contemplated in Section 42 as it stood before 01.10.2022. The petitioner also raised a contention regarding limitation under Section 73, pointing out that the notice was issued on 20.05.2025 for the 2019–2020 period. Reliance was placed on decisions of the Calcutta High Court, Supreme Court, and Allahabad High Court.

The respondents argued that the petitioner failed to ensure that the suppliers remitted tax, and that a prior notice had been issued. They relied on Section 16(2)(c) and submitted that the show cause notice was legally valid. They also referred to Notification No.56/2023 extending the period for issuing final orders under Section 73.

The Court recorded that Section 16(2)(c), as it stood at the relevant time, required that tax charged on supply must be actually paid to the Government. It then examined Section 42 and stated that “there is an obligation imposed upon the assessing authority, to issue a notice communicating the discrepancy, to both such persons, in case a short supply is found.” The Court recorded that no such proceedings were undertaken before issuing the impugned notice.

Referring to Section 42(5), the Court observed that “the amount in respect of which any discrepancy is communicated under sub-section (3) and which is not rectified by the supplier… shall be added to the output tax liability of the recipient” and held that this procedure presupposed a mandatory notice to the supplier before proceeding against the purchaser.

The Court discussed the judgment in Suncraft Energy and extracted the findings, including the statement that “there shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by seller” and that recovery should be initiated from the seller except in exceptional situations. The Court noted the extracted observation: “before directing the appellant to reverse the input tax credit… the first respondent ought to have taken action against the… selling dealer.”

The Court referred to the Supreme Court's refusal to interfere with the Calcutta High Court decision and further noted similar views of the Allahabad High Court. It then referred to Shanti Kiran India (P) Ltd., quoting the Delhi High Court’s interpretation that the Department must first proceed against the selling dealer and that the purchaser may be proceeded against only in cases of collusion or other exceptional circumstances.

Applying these principles, the Court stated that “no proceedings have been initiated against the suppliers… before the issuance of Ext.P3 notice” and that this constituted a failure to follow the statutory scheme. It further recorded that none of the exceptional circumstances permitting action directly against the purchaser had been shown.

The Court stated that in view of this finding, the issue of limitation need not be considered.

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The Court held: “this writ petition is disposed of quashing Ext.P3, holding that, as there are no proceedings so far initiated against the 2nd and 3rd respondents, the notice in nature of Ext.P3 could not have been issued to the petitioner. Any observation made by this Court will not preclude the authority concerned from initiating proceedings against the 2nd and 3rd respondents.”

Advocates Representing the Parties

For the Petitioner: Sri. M.S. Sajeev Kumar, Smt. Lakshmi S Kumar, Smt. A.N. Jyothilekshmi
For the Respondents: Sri. R. Harishankar

Case Title: M/s. K.V. Joshy & C.K. Paul v. Assistant Commissioner & Others
Neutral Citation: 2025: KER:80543
Case Number: WP(C) No. 24617 of 2024
Bench: Justice Ziyad Rahman A.A.